Today I’m looking at two of the last year’s most successful mid-cap technology stocks. One of these firms has risen by more than 100% over the last year. The other has gained 40%.
To put this in context, the FTSE 100 has fallen by 2.5% over the same period.
That’s no disaster, but it’s clear that investors who’ve focused on identifying good quality growth stocks have seen the value of their holdings crush the wider market. Today I’m asking whether further gains are likely from these tech growth stocks.
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A booming market
The market cap of Dublin-based video games services specialist Keywords Studios (LSE: KWS) has risen to almost £1bn over the last year, as the group’s share price has doubled. Today Keywords published full-year results, showing that revenue rose by 57% to €151.4m last year, while adjusted pre-tax profit was 55% higher at €23m.
This business provides a range of specialist services that video games producers can’t do without. The firm’s origins lie in providing localisation services, such as translation and voiceovers in different languages. It’s expanded with a string of acquisitions and now also offers functional testing, artwork, engineering and music-related services.
The company’s stated aim is to consolidate the video game services sector, which is currently highly fragmented. So far progress has been good.
Should you buy this stock today?
Before deciding whether to award Keywords Studios a buy rating, I want to consider how profitable this business is. Last year saw the group’s operating margin fall from 11.9% to 10.9%. From what I can tell, this decline is partly down to the $66.4m acquisition of testing group VMC last year.
These margins aren’t outstanding but are expected to improve as acquisitions bed-in. And analysts expect the group’s continued growth to drive earnings up by 48% to €0.46 per share this year. I calculate that this gives a price/earnings growth ratio of 1.2 for the year ahead.
That’s a little higher than the PEG ratio of 1 I’d look for in a growth stock. In my view, Keywords Studios is fairly priced at current levels. I’d view any dips as a buying opportunity.
Beat the queues
Shareholders of Accesso Technology Group (LSE: ACSO) have enjoyed a 130% share price gain over the last two years. This company makes virtual queuing systems used in theme parks and at other major attractions. If you’ve used them, you’ll know why they’re so popular — you can avoid spending hours in slow-moving queues.
However, the company isn’t stopping there. Solutions now include ticket sales, access control and support for personalised services such as promotions, food ordering and much more.
The firm hopes that its technology base will allow it to expand into other sectors. Accesso recently announced a trial project with a US hospital group to provide features such as concierge services, food and care preferences, patient communication and smartphone bill payments.
Fully priced?
Shares in this fast-growing firm have always looked expensive by conventional measures. But adjusted earnings are expected to increase by about 32% in both 2018 and 2019. This gives the stock a 2018 price/earnings growth ratio of just 1.7.
This suggests to me that the stock is fully priced but not necessarily expensive. As with Keywords Studios, I’d continue holding Accesso Technology and would consider buying more on any dips.
